Party pledges for the Dec. 16 general election have highlighted the sense of urgency for economic reforms as the nation remains mired in deflation. But the pledges also reveal a dearth of long-term strategies.
The debate has revolved around what the parties would do, if they win, to make the Bank of Japan turn the economy around.
This focus has left many unanswered questions about how to improve the nation’s growth potential as the population ages and companies shift production abroad.
“It’s just like a doctor who only tries to reduce the fever of his patient without looking into the specific cause of the disease,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan Co. “They only discuss in fragments” the main problems, including the graying population, falling birthrate and eroding industrial competitiveness.
Shinzo Abe, who heads the Liberal Democratic Party and would replace Democratic Party of Japan leader Yoshihiko Noda as prime minister if the LDP wins the Lower House election, has said he would force the BOJ to ease monetary policy until annual inflation reaches 2 percent, higher than the central bank’s current goal of 1 percent.
Abe’s plan, which also involves asking the BOJ to finance the government’s public works projects by printing money and revising a law to oblige the bank to meet the inflation target, initially pushed the yen lower against the dollar and drove Tokyo stocks higher.
“Now we have been forced to pay for a flawed monetary policy,” Abe said in a stump speech, referring to current economic difficulties.
Noda quickly criticized Abe’s position on the BOJ, labeling it “extremely dangerous” because it would add to Japan’s huge public debt, already the highest in the world. Even business leaders, who should have welcomed the stronger monetary easing policy, called Abe’s plan reckless.
The debate on how to use the BOJ as a catalyst in the battle against chronic deflation is not, however, a guarantee that the outcome of the election will indicate a way for the economy to pull out of its stagnation at a time when sweeping reforms are needed.
“All Japan has to do is enhance its growth potential, not adopt easy, short-term measures to boost domestic demand,” said Hiromichi Shirakawa, chief economist at Credit Suisse Securities (Japan) Ltd.
Indeed, many analysts call for policies that would support innovation in technology and deregulation, with some pointing out that significant revision to immigration policy would help the country address a future labor shortage.
However, both the DPJ and LDP have been short on specifics about longer-term strategies to revitalize the economy — though they have promised to foster sectors including the health care and green industries through tax and other incentives while actively pursuing free-trade deals.
On the fiscal front, both the LDP and DPJ have pledged to create a “large” extra budget for fiscal 2012, which ends in March, to stimulate the economy as it is feared to have slipped into a mild recession on slower exports and a drop in production amid the global economic downturn.
But at the same time, both are required to maintain fiscal discipline, given Japan made an international pledge to achieve a primary budget surplus in fiscal 2020, which means the government can forgo new bond issuance in financing its expenditures except for debt-servicing costs.
To get there, Tokyo is believed to have to raise the consumption tax further, even after the DPJ, LDP and smaller opposition parties passed a bill earlier this year to double the sales tax to 10 percent by 2015.
With investors focusing on Japan’s fiscal health, any failure to meet those pledges could increase the chances of the country’s credit ratings being downgraded by major rating agencies, which have already warned that political instability in Tokyo could prevent the establishment of a credible fiscal restoration plan.
It is this kind of situation that Noda’s administration has sought to avoid. He has repeatedly warned against any delay in improving the nation’s public finances, citing the sovereign debt crisis in Greece and other examples in the eurozone.
Drawing a clear line, Abe said, “We must first beat deflation and then increase tax revenues (on brisk economic activities) in order to enable fiscal reconstruction.”